Merck's Fall from Grace

FEATUREMerck's Fall Getty Images How will one of the world's largest and most respected pharmaceutical companies come back? BY FRAN HAWTHORNETIME LIFE PICTURES Better times:Merck President George M. Merck in 1952ARTICLE EXTRASTimeline: Taking Stock of MerckWhen former employees speak of Old Merck, they often get a wistful tone to their voices. For Alaina Love Cugnon, the 1980s and

May 1, 2006

Fran Hawthorne

FEATURE

Merck's Fall

Getty Images

How will one of the world's largest and most respected pharmaceutical companies come back?

When former employees speak of Old Merck, they often get a wistful tone to their voices. For Alaina Love Cugnon, the 1980s and early 1990s were a time of shared excitement in Merck & Co.'s research labs in Rahway, NJ. "The staff would come to my house for lunch, then we'd work till however long at night. One guy would routinely have 700 mice to dose in one experiment. I would finish my work and go over to his lab and help him. It wasn't even my department. You didn't think twice about it."

"There was a sense that we were doing something to make people's lives better," continues Cugnon, who spent 12 years at Merck, starting in 1982 doing research and clinical trials for the heartburn drug, Pepcid, before switching to human resources.

Back in Cugnon's day, Merck really was a special kind of company. Fortune magazine cited it as the "most admired" company in America for seven years in a row, a record never equaled before or since. It was the world's largest drug maker, churning out first-of-a-kind medicines for cholesterol, osteoporosis, and high blood pressure. And it gained almost-cult status for its decision in 1987 to give away, indefinitely, its entire production of a drug for river blindness, a devastating condition that affects millions of people in impoverished countries.

Even five years ago, Merck was still booming. It had five best-selling drugs, including the new arthritis and pain medicine, Vioxx. Its stock hit 90. It was perceived as a great place to work and a model for other pharmaceutical companies to follow.

Today, Vioxx has been pulled off the market because it increases the risk of heart attacks and strokes, two more major products are losing patent protection, and there has been a leadership reshuffle. The stock - which had been on an almost nonstop climb since Cugnon's time, except for a brief industry-wide hiccup in the early 1990s broadly attributed to fear of President Clinton's healthcare reform - has been sliding ever since the first published warnings of Vioxx in 2000 and is now hovering in the 30s. Far from being admired, Merck is now criticized by former employees, other industry players, government officials, and the general public.

"All of us who truly had faith in the company are very sad to see what's become of it," says Eve Slater, a senior executive in research and then public affairs at Merck from 1983 to 2001, and now an associate professor at Columbia University. "It's damaged itself, and it's damaged the industry."

A combination of troubles brought down Merck, some of them common to the industry, some unique. Like other manufacturers, Merck lost patent exclusivity on many of its best sellers, opening up the company to cheaper generic competition, while it struggled to develop new blockbusters to replace them. Moreover, the public has become furious at the industry's high prices and questioning of the barrage of TV advertising. Merck compounded those problems with weak leadership and a willful blindness to Vioxx's risks, say Slater and other former Merck employees, Wall Street analysts, and other industry experts contacted for this article.

Over the past year, Merck has taken some steps to pull itself back up. CEO Raymond V. Gilmartin was pushed out, replaced by veteran Richard T. Clark, who has boosted morale and cut costs. The US Food and Drug Administration recently approved RotaTeq, an innovative vaccine for rotavirus that causes pediatric diarrhea. Several other new vaccines and drugs are scheduled for FDA review as well (see Pipeline chart). However, outside experts say Merck still needs stronger offerings in hot fields such as obesity, cancer, Alzheimer disease, and depression. The new CEO is seen as a nice enough guy but lacking vision and charisma, say people who have worked with him, including Slater and Simon Benito, who held a range of managerial positions at Merck from 1974 to 1999, as well as long-time industry observers such as analyst David Moskowitz of Friedman, Billings, Ramsey & Co. And, a big question mark is the 9,600-plus lawsuits filed by patients who took Vioxx: Merck has so far won two out of four trials with a mixed verdict on a fifth.

"The fundamentals are improving," says Shaojing Tong, an analyst with the New York-based money management firm Mehta Partners (which holds no shares of Merck and has kept a "market perform" recommendation on the stock for several years). "But they have the big overhang of Vioxx litigation."

FOLLOW THE LEADER

The key to understanding Merck's slide is to compare its CEOs. During the glory days, it was led by scientist P. Roy Vagelos, who is almost universally described as brilliant, charismatic, arrogant, and hard-driving, both by industry experts and by people who worked with him (including Benito, Cugnon, and longtime Merck marketing executive C. Boyd Clarke, who now runs Neose Technologies, a biotech near Philadelphia). The son of Greek immigrants, Vagelos grew up cleaning tables in his family's luncheonette, in the shadow of the Merck labs. As head of Merck's R&D for nine years, he brought in hundreds of new scientists, modernized the labs, and increased the research budget an average of 17.2% annually. Because he understood the science, old-timers say, Vagelos was able to inspire the creativity and energy that Cugnon describes even after he became chief executive in 1985. Moreover, Vagelos got personally involved in the everyday workings of the company. He even ate lunch in the cafeteria.

But even admirers like Benito and Alfred W. Alberts, a longtime head of biochemical regulation who was probably Vagelos' closest colleague, blame Vagelos for one big failing: He did not groom a viable successor from within. (Vagelos failed to respond to several requests for interviews for this article.) When he left in 1994 at the mandatory retirement age of 65, the board brought in Gilmartin, the CEO of Becton, Dickinson and Company, a manufacturer of medical devices. Although Gilmartin had an MBA from Harvard and some experience on the fringes of health care, he lacked Vagelos' most important attributes: scientific experience and charisma. "They went from a dynamic visionary to a nice guy," says Ira S. Loss, an executive vice president of the financial research firm Washington Analysis who specializes in health care.

Certainly, no one blames Gilmartin for the R&D pipeline he inherited. It was just bad luck that so many fruits of the Vagelos era - including Pepcid, Prilosec for heartburn, Mevacor for cholesterol, and Vasotec and Prinivil for high blood pressure - reached the end of their patent protections almost simultaneously. Nor was it Gilmartin's fault that promising compounds for diabetes, anxiety, cancer, and depression fell through in medium- or late-stage trials.

Nonetheless, several insiders - including Alberts, Steven M. Darien, a former vice president of human resources, and Benito - charge that Gilmartin stifled research by adding layers of bureaucracy and consultants. Even more controversial, the new bureaucracy included marketing people, who sat in on the earliest stages of drug development. While this was happening throughout the industry, many scientists and consumer advocates worry that the pressure for billion-dollar sales could influence the science. "All big pharmaceutical companies have to make decisions based on financial considerations. But science was more important when Vagelos was there," says Vijay Samant, who spent more than 20 years at Merck, leaving in 2001 as chief operating officer of the vaccine division.

Peter Kim (L), the current head of R&D, was brought on board by former CEO Raymond Gilmartin (R) to help fill a drying pipeline.

"The need to preserve Vioxx's place was greater than it would have been if Merck had four or five other drugs on the cusp. It tends to lead to minimization of risks that might not have been taken had there been other products around." -Ira S. Loss

The new CEO also walled himself off from the staff; the employee cafeteria was not for him. "Gilmartin was completely removed from the organization. From the get-go, he had consultants that he used to rely on as his eyes and ears," says Benito. Because he had no scientific training, Gilmartin couldn't energize the scientists by chatting with them in the halls, as Vagelos did. Instead, observers such as former Merck officials Slater and Alberts say Gilmartin relied too much on R&D chief Edward Scolnick, who retired in December 2002. (Some industry sources did not want to be quoted discussing the Gilmartin-Scolnick relationship, because they didn't want to make negative remarks about specific people in print.)

"Scolnick knew more than any of us in the labs," says Slater. "But if I'm running a company where the primary product is something I don't have my basic training in, there's no way I'm going to take input from just one person."

In 2000, Merck recruited biologist Peter Kim from the Massachusetts Institute of Technology as the heir apparent to Scolnick. News stories hailed him as a "star" and described the hiring as a coup. Among other things, he was a member of the Whitehead Institute for Biomedical Research and an investigator for the Howard Hughes Medical Institute. It was seen as proof that Merck still had the star power to attract someone from a prestigious academic institution, and the foresight to go after such a scientist.

Other large companies with pipeline problems were taking a new approach to bolster R&D. Instead of relying on their own labs (the traditional research model) they started to sign licensing deals with the scrappy biotechs where most of the cutting-edge research is now taking place. Gilmartin, however, stuck to the old way of doing things. If Merck scientists didn't develop a particular drug in Merck labs, then it wasn't worth developing. According to Norwalk, Conn.-based research firm Windhover Information, Merck arranged just 62 in-licensing deals from 1991 through mid-2002, about half as many as its major competitors.

THE ANEMIC PIPELINE

The weak pipeline forced Merck to rely on its existing moneymakers. One of the biggest, with $2.5 billion a year in sales, was Vioxx.

Vioxx had been a pet project of Scolnick, who pushed researchers to get it on the market before Celebrex, a rival product from Monsanto. (Celebrex nevertheless was introduced first, less than five months before Vioxx, in late 1998. After a series of corporate mergers Celebrex is now marketed by Pfizer.) "The need to preserve Vioxx's place was greater than it would have been if they had four or five other drugs on the cusp. It tends to lead to minimization of risks that might not have been taken had there been other products around," says Loss of Washington Analysis.

At what point Merck realized Vioxx's dangers is one of the issues in the lawsuits. Because heart attacks are so common among the general population, just the fact that Vioxx users were having heart trouble might not mean anything. The major postmarket study of Vioxx, a 7,000-patient trial known as VIGOR, did not set out to study cardiovascular issues. It was aimed at determining whether patients with rheumatoid arthritis who took a high dose (50 milligrams) of Vioxx had fewer gastrointestinal side effects than those taking naproxen, an over-the-counter pain reliever. The study, released in 2000, confirmed the gastrointestinal benefit, but it unexpectedly also found that the Vioxx users had five times as many heart attacks (five in 1,000 Vioxx patients vs. one in 1,000 naproxen patients).

Merck Pipeline: Major Compounds Closest to Market

Name

Disease Target

Status

Gardasil

Cervical cancer/human papillomavirus

Under review by FDA

Zostavax

Shingles (adult chicken pox)

Under review by FDA

Januvia

Diabetes

Under review by FDA

MK-0518

HIV

Phase III trials

Gaboxadol

Insomnia

Phase III trials

MK 524A and B

High cholesterol

Phase III trials

MK 518

HIV

Phase III trials

Should Merck have recognized at that point that Vioxx posed serious cardiovascular risks? Merck argued that the disparity was due to some cardio-protective aspects of naproxen, not any problem with Vioxx, and that only a placebo-controlled clinical trial could truly determine Vioxx's safety profile. More studies seemed to confirm a higher risk with Vioxx, but none of them was a gold-standard clinical trial. Finally, in September 2004, Merck was faced with proof from exactly that kind of trial: In a three-year test of 2,600 patients, those taking a moderate, 25-milligram dose of Vioxx for 18 months or more showed double the risk of a heart attack or stroke (15 incidents per 1,000 patients) as those in the control group. (There was no significant difference among patients taking the drug for less than 18 months.) Ironically, this study also was not aimed at analyzing cardiovascular problems; Merck had hoped to prove that the 25-milligram dose prevents a recurrence of colorectal polyps.

Many critics, including FDA safety official David Graham, Eric Topol of the Cleveland Clinic, and analyst Richard B. Stover of Arnhold and S. Bleichroeder Advisors, blame Merck for keeping Vioxx on the market too long. Others, such as Benito and analysts Tong and Mike Krensavage of Raymond James & Associates, fault the company for pulling it off the market. That move weakened Merck's legal defense, they assert, while stranding patients who could have benefited from short-term use.

So at the moment, Merck's future is hostage to Vioxx. The company has set aside $685 million for legal fees, in addition to the $285 million already spent. That doesn't include potential payouts to plaintiffs, which experts say could hit $30 billion, or the time that executives and staff scientists devote to preparing testimony. The numbers may sound big, but plaintiffs' lawyers insist that with $22 billion in sales and $4.6 billion in profits last year, Merck can afford it. (Officials at Merck did not respond to repeated requests for interviews.)

LOOKING FORWARD

When will Merck be free of the Vioxx overhang? Plaintiffs have until October to file lawsuits, and then it will be at least another year before a win-loss pattern becomes apparent, say Loss and Tong. "If they win 50% of cases, that should be a very good sign," Tong says. The perception also depends on the type of cases; for instance, it should be easier to prevail against a plaintiff who took Vioxx for less than 18 months. By comparison, the drug company Wyeth is still battling lawsuits over the diet-drug combination fen-phen, which was withdrawn in 1997, and has set aside more than $21 billion to pay claims.

While the Vioxx trials unwind, Merck must still focus on filling its pipeline; after all, having products to sell is the basic requirement of any company. Two of its remaining four blockbusters - cholesterol drug Zocor, its biggest seller, and osteoporosis drug Fosamax - will go off-patent in June and in 2008, respectively, costing Merck about $7.6 billion in income.

Some new products could help fill that gap, such as the new rotavirus product, which the Centers for Disease Control and Prevention has recommended as a standard childhood vaccine. Any day now, the FDA is also expected to give the green light to vaccines for herpes zoster (adult chickenpox, or shingles) and human papillomavirus (HPV), the leading cause of cervical cancer. As the first vaccine to prevent any type of cancer, the HPV product has prompted glowing headlines. It has even gained qualified support from conservative religious groups such as Focus on the Family, which were expected to denounce the drug for encouraging teenage sex. (HPV is spread mainly by sexual contact, and Merck is proposing it for young teenagers.)

COURTESY OF MERCK SHARP & DOHME

Current CEO Richard Clark is trying to steer Merck toward a successful future. His mandatory retirement in less than five years raises questions of succession.

Vaccines have traditionally not been seen as moneymakers, because they are difficult to manufacture, patients don't take them for long, and the government often restricts the price. But some analysts say "niche" vaccines like these three are different. Wyeth rakes in $1 billion a year from its Prevnar vaccine for meningitis, for instance. Annual sales of $1 billion to $3 billion are predicted for the HPV vaccine.

Other Merck compounds for diabetes, cholesterol, and AIDS are in late-stage trials or already at the FDA. Analysts, former Merck officials, and investors (such as Tong, Loss, Samant, Benito, and Edward Pittman of the NJ Division of Investment at the state's Department of the Treasury) are optimistic. Much attention has focused on the new cholesterol product, which involves reformulating the vitamin niacin to boost "good" HDL cholesterol. Even better for Merck, it is being tested in conjunction with Zocor (which, like other existing cholesterol drugs, works by reducing "bad" LDL cholesterol), thus potentially extending Zocor's usefulness.

Merck has also been doing more outside deals and been more open to late-stage licensing. According to Windhover, Merck's roster of deals rose steadily from 16 in 2002 to 28 in 2004, though it dropped to 15 last year. Among them are licenses for hepatitis B, HIV, and cancer vaccines from Vical, a San Diego biotech run by former Merck vaccines chief Samant.

Last fall, however, the FDA turned back a diabetes product Merck planned to market with Bristol-Myers Squibb, because of questions about cardiovascular safety. And Merck in March pulled out of an agreement to codevelop an anti-obesity nasal spray with Seattle-based biotech Nastech Pharmaceutical; Merck claimed the drug was ineffective in trials. Other than the HPV vaccine, Merck has no imminent candidates in the hot fields of neurology and oncology. The new drugs "are not enough to fill the generic gap," analyst Tong says.

RETURN TO THE CAFETERIA

The new CEO, Clark, is overseeing a possible revival. Although he had spent 32 years at Merck running both manufacturing and the former pharmacy benefits subsidiary, Clark was a surprise choice when Gilmartin stepped down a year ago, under fire from all sides, as news articles noted at the time. He had not surfaced on the periodic lists of in-house heirs-in-waiting, let alone the musings about an outside savior galloping in. "I was underwhelmed by the choice," says analyst Loss. "I really thought they would go outside to get somebody to come in and shake the whole thing up." With a self-deprecating sense of humor and an easy-going manner, Clark is considered a consummate operations pro, but not a visionary leader. Darien, the former vice president of human resources, remembers that Clark never dominated the committees they worked on together. It is clear that he is not another Vagelos.

But, he is also not another Gilmartin. "He is very connected with his people. He understands how the organization works," says Benito, the longtime former manager. Insiders say that Clark regularly gets together with managers and sales reps, and has given the staff his E-mail address (no guarantee that they will get a reply, but it at least sends the message that feedback is encouraged, the sources say). And, yes, he eats in the company cafeteria. Indeed, in a symbolic gesture, he invited Vagelos in for a chat, and both went to the cafeteria for lunch.

"Having a CEO who understands the biology of the disease has got to be a tremendous asset, particularly as we get closer to individualized medicine." -Gerald J. McDougall

Calling on his management experience, Clark has taken a sharp knife to costs, promising to slash the workforce 11% by 2008 and close or sell off five of the 21 manufacturing facilities he once ran. Clark also plans to revamp marketing. One indication that he is serious was his recent appointment of outsider Peter Loescher as president of global human health. In this newly created position Loescher will oversee Merck's marketing and sales divisions. Other drug makers under similar pressure, such as Pfizer and Wyeth, have taken similar moves. Clark predicted his actions would save $4 billion by 2010, but that is not enough for analyst Krensavage, who says the cost cutting is "lukewarm." (Krensavage has a strong "buy" recommendation on the stock because of the company's cash flow.) Benito thinks the payroll needs to be cut another 11% at least, while some insiders gripe that the people who really should be axed are the management committee that got the company in trouble in the first place.

In any case, with less than five years until mandatory retirement, Clark will have a relatively short term while facing questions of succession. So the guessing-game unfolds: Where will Merck get its next CEO? Will he or she be cut in the mold of Vagelos, or is a new type of leader needed for these new times? Some people advocate the Vagelos model, in which the CEO comes from the scientific ranks.

"Having a CEO who understands the biology of the disease has got to be a tremendous asset, particularly as we get closer to individualized medicine," says Gerald J. McDougall, the partner in charge of PriceWaterhouseCooper's health science practice. McDougall and other experts say that a scientist-CEO can help guide the company through the federal approval process, provide a reality check on lab directors' pet projects, and appreciate how a physician will actually use the product. For the lab staff, "it creates a sort of esprit de corps. They know that he understands," adds Loss.

Today, only two major pharmaceutical companies are led by scientists: Daniel Vasella, a physician, is CEO of Novartis, and Jean-Pierre Garnier, a PhD in pharmacology is head of GlaxoSmithKline. Most other drug company chiefs hold MBA degrees.

The next Merck CEO will most likely not come from inside, many people predict, because the obvious heirs, such as Bradley T. Sheares, cohead of US pharmaceuticals, are tainted by Vioxx.Research chief Peter Kim might seem like an ideal candidate to be the next Vagelos. However, although Kim was seen as a brilliant researcher, some observers had concerns about his administrative ability when he took over after Scolnick retired, noting that he had never run a large organization. That's also why he wasn't seen as a likely successor to Gilmartin, according to news stories, and even if he was another Vagelos, that science pedigree may not be the optimal background it once was. "It's very hard to make a transition from academia to drug development," says Samant. "Anybody who runs such a large organization [as Merck labs] has to have a lot of development experience, has to have an understanding of the regulatory pathways, and has to have experience filing INDs. Today's drug development is much more complicated than it was 15 to 20 years ago," that is, when Vagelos was recruited from academia to head Merck R&D.

Wall Street has been drooling for years over the possibility of a merger with Schering-Plough, largely because the two companies together market the successful cholesterol drugs Vytorin and Zetia. "Clark's kind of an interim person, until [Schering-Plough CEO] Fred Hassan takes over," Krensavage says, only partly flippantly. (No one else was willing to talk about future management changes on the record, because of the sensitivity of the subject.) However, Gilmartin always rejected merger talk, and Clark has said only that he would consider acquiring a relatively big biotech. Pharmaceutical giants such as Pfizer and GlaxoSmithKline have found that a merger can be more expensive, more disruptive to morale, and less productive in the labs than they anticipated.

To revive its reputation, Merck must not only create a healthy pipeline and score with several big-money drugs, but also polish its once stellar image among researchers, physicians, and the public. "The company I was with, it was the number-one company in the world. Before I worked for Merck, I aspired to work for Merck. Now, I would not," says Benito. The tarnished image may perhaps be the easiest part of the equation to fix. Even one of the industry's harshest critics, Larry Sasich, a consultant to the consumer group Public Citizen and an assistant professor at Lake Erie College of Osteopathic Medicine, says, "If you're an ob-gyn and you have a vaccine for cervical cancer, I don't think you're thinking about Merck and Vioxx. You're thinking about the vaccine and could it help your patient."

Fran Hawthorne is the author of The Merck Druggernaut (John Wiley & Sons, 2003) and Inside the FDA: The Business and Politics Behind the Drugs We Take and the Food We Eat (Wiley, 2005).fhawthorne@the-scientist.com